Deck 11: Corporations: Paid-In Capital and the Balance Sheet

Question 1

A corporation issues stock certificates to the stockholders when they buy the stock.

Answer 1

True

Question 2

Which of the following characteristics of a corporation exists because a corporation is formed under the laws of a particular state and has many of the same rights as a person?

A) Separate legal entity
B) Separation of ownership and management
C) No mutual agency
D) Transferability of ownership

Answer 2

Separate legal entity

Question 3

Which of the following characteristics of a corporation exists because the ownership of a corporation is divided into shares that can be sold, gifted, or bequeathed?

A) Double taxation
B) Limited liability
C) Transferability of ownership
D) No mutual agency

Answer 3

Transferability of ownership

Question 4

Which of the following characteristics of a corporation exists because a contract signed by one owner is not binding for the whole company?

A) Double taxation
B) Transferability of ownership
C) Separation of ownership and management
D) No mutual agency

Question 5

Which of the following characteristics of a corporation exists because stockholders elect a board of directors and the board appoints officers to manage the business?

A) No mutual agency
B) Transferability of ownership
C) Double taxation
D) Separation of ownership and management

Question 6

Which of the following characteristics of a corporation exists because corporations pay taxes on corporate earnings?

A) Double taxation
B) No mutual agency
C) Separation of ownership and management
D) Transferability of ownership

Question 7

What types of stock can a corporation issue?

A) Preferred stock can be issued, but not common stock.
B) Common stock can be issued, but not preferred stock.
C) Both common stock and preferred stock can be issued.
D) Neither common stock nor preferred stock can be issued.

Question 8

Retained earnings represent amounts received from the stockholders.

Question 9

Profitable operations result in net income, which increases retained earnings.

Question 10

Which of the following is TRUE of retained earnings?

A) Retained earnings do not appear on any financial statement.
B) Retained earnings represent investments by the stockholders of a corporation.
C) Retained earnings represent capital that the corporation has earned through profitable operations.
D) Retained earnings are a liability on the corporate balance sheet.

Question 11

The following information is from the balance sheet of Tudor Corporation as of December 31, 2010.
$\begin{array}{|l|r|r|}\hline\text { Preferred stock, } \$ 100 \text { par } & & \$ 500,000 \\\hline \text { Paid-in capital in excess of par - preferred } & & 35,000 \\\hline \text { Common stock, } \$ 1 \text { par } & & 190,000 \\\hline \text { Paid-in capital in excess of par - common } & & 380,000 \\\hline \text { Retained earnings } & & 131,500 \\\hline \text { Total stockholders' equity } & & \$ 1,236,500 \\\hline\end{array}$ What was the total paid-in capital as of December 31, 2010?

A) $1,236,600
B) $1,105,000
C) $ 956,000
D) Total paid-in capital cannot be determined from the information given

Question 12

Payment of the dividend usually follows the declaration date by a week or two.

Question 13

When a corporation fails to pay the dividend on cumulative preferred stock, the preferred shareholders will never receive these dividends.

Question 14

On which of the following dates do dividends become a liability of a corporation?

A) Dividends become a liability of a corporation on the declaration date.
B) Dividends become a liability of a corporation on the date of record.
C) Dividends become a liability of a corporation at the end of the accounting period when the adjusting entry is prepared.
D) Dividends become a liability of a corporation on the payment date.

Question 15

Which of the following is preferred stock that provides for the payment of previously passed preferred dividends before dividends may be paid on common stock?

A) Cumulative preferred stock
B) No-par preferred stock
C) Participating preferred stock
D) Par value preferred stock

Question 16

A corporation has 10,000 shares of 10%, $50 par, noncumulative preferred stock outstanding and 20,000 shares of no-par common stock outstanding. At the end of the current year, the corporation declares a dividend of $120,000.
How is the dividend allocated between preferred and common stockholders?

A) The dividend is allocated $5,000 to preferred shareholders and $115,000 to common shareholders.
B) The dividend is allocated $50,000 to preferred shareholders and $70,000 to common shareholders.
C) The dividend is allocated $60,000 to preferred shareholders and $60,000 to common shareholders.
D) The dividend is allocated $12,000 to preferred shareholders and $108,000 to common shareholders.

Question 17

A corporation has 15,000 shares of 10%, $50 par cumulative preferred stock outstanding and 25,000 shares of no-par common stock outstanding. Dividends of $37,500 are in arrears. At the end of the current year, the corporation declares a dividend of $120,000.
What is the divided allocated between preferred and common shareholders?

A) The dividend is allocated $7,500 to preferred shareholders and $112,500 to common shareholders.
B) The dividend is allocated $112,500 to preferred shareholders and $7,500 to common shareholders.
C) The dividend is allocated $120,000 to preferred shareholders and $0 to common shareholders.
D) The dividend is allocated $75,000 to preferred shareholders and $45,000 to common shareholders.

Question 18

A corporation has 15,000 shares of 10%, $50 par, noncumulative preferred stock outstanding and 25,000 shares of no-par common stock outstanding. No dividends were declared in 2008. At the end of 2009, the corporation declares a dividend of $150,000.
What is the dividend allocated between preferred and common shareholders?

A) The dividend is allocated $75,000 to preferred shareholders and $75,000 to common shareholders.
B) The dividend is allocated $142,500 to preferred shareholders and $7,500 to common shareholders.
C) The dividend is allocated $150,000 to preferred shareholders and $0 to common shareholders.
D) The dividend is allocated $7,500 to preferred shareholders and $142,500 to common shareholders.

Question 19

Which of the following is true of stockholders' equity?

A) Profitable operations do not increase stockholders' equity.
B) Issuance of preferred stock does not increase stockholder's equity.
C) Issuance of common stock does not increase stockholder's equity.
D) Declaration of a cash dividend does not increase stockholders' equity.

Question 20

The dividend payment date is the same as the date of record.

Question 21

When companies "pass the dividend", the dividends are said to be:

A) preferred.
B) in arrears.
C) cumulative.
D) declared.

Question 22

Book value is the amount of owner's equity on the company's books for each share of its stock.

Question 23

Which of the following is the amount of owners' equity on the company's books for each share of its stock?

A) Book value
B) Market value
C) Cumulative equity
D) Average shareholders' equity

Question 24

Which of the following is the book value of preferred stock?

A) The book value of preferred stock is equal to liquidation value minus any dividends in arrears.
B) The book value of cumulative preferred stock is equal to par value minus any dividends in arrears.
C) The book value of preferred stock is equal to liquidation value plus any dividends in arrears.
D) None of the above.

Question 25

The following information is from the balance sheet of a corporation as of December 31, 2010. Preferred
Dividends are in arrears for the 2009 and 2010.
$\begin{array}{|l|r|}\hline \begin{array}{l}\text { Preferred stock, cumulative, } 7 \%, \$ 50 \text { par, } 6,000 \text { shares } \\\text { issued }\end{array} & \$ 300,000 \\\hline \text { Paid-in capital in excess of par - preferred } & 30,000 \\\hline \text { Common stock, } \$ 5 \text { par, } 20,000 \text { shares issued } & 100,000 \\\hline \text { Paid-in capital in excess of par - common } & 297,500 \\\hline \text { Retained earnings } & \underline{138,500} \\\hline \text { Total stockholders' equity } & \$ 866,000 \\\hline\end{array}$ What is the book value for the preferred stock?

A) The book value is $53.50 per share.
B) The book value is $57.00 per share.
C) The book value is $62.00 per share.
D) The book value is $50.00 per share.

Question 26

The following information is from the balance sheet of a corporation as of December 31, 2010. Preferred dividends are in arrears for the 2009 and 2010.
$\begin{array}{|l|r|}\hline \begin{array}{l}\text { Preferred stock, cumulative, } 7 \%, \$ 50 \text { par, } 6,000 \text { shares } \\\text { issued }\end{array} & \$ 300,000 \\\hline \text { Paid-in capital in excess of par - preferred } & 30,000 \\\hline \text { Common stock, } \$ 5 \text { par, } 20,000 \text { shares issued } & 100,000 \\\hline \text { Paid-in capital in excess of par - common } & 297,500 \\\hline \text { Retained earnings } & \underline{138,500} \\\hline \text { Total stockholders' equity } & \$ 866,000 \\\hline\end{array}$ What is the book value for the common stock?

A) The book value is $24.70 per share.
B) The book value is $19.88 per share.
C) The book value is $28.30 per share.
D) The book value is $5.00 per share.

Question 27

The following information is from the balance sheet of Scott Corporation as of December 31, 2010.
$$\begin{array} { | l | r | r | } \hline \text { Preferred stock, cumulative, } 10 \% , \$ 100 \text { par } & & \$ 100,000 \\\hline \text { Common stock, } \$ 50 \text { par } & 200,000 & \\\hline \text { Paid-in capital in excess of par - common } & & 200,000 \\\hline \text { Retained earnings } & \underline { 100,000 } & \\\hline \text { Total stockholders' equity } & \$ \underline { 600,000 } & \\\hline\end{array}$$ The corporation did not declare a dividend in 2008 or 2009. There were no dividends in arrears before 2008. Which of the following is the book value per share for preferred stock and common stock?

A) The book value is $120 per share for preferred stock and $120.00 per share for common stock.
B) The book value is $110 per share for preferred stock and $122.50 per share for common stock.
C) The book value is $600 per share for preferred stock and $0 per share for common stock.
D) The book value is $100 per share for preferred stock and $125.00 per share for common stock.

Question 28

The following information is from the balance sheet of White Corporation as of December 31, 2010.
$$\begin{array} { | l | r | } \hline \text { Preferred stock, cumulative, } 10 \% , \$ 100 \text { par } & \$ 100,000 \\\hline \text { Paid-in capital in excess of par - preferred } & 200,000 \\\hline \text { Common stock, } \$ 50 \text { par } & 200,000 \\\hline \text { Paid-in capital in excess of par - common } & 200,000 \\\hline \text { Donated capital } & 50,000 \\\hline \text { Retained earnings } & \underline { 100,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 850,000 } \\\hline\end{array}$$ The corporation did not declare a dividend in 2008 or 2009. There were no dividends in arrears before 2008. Which of the following is the book value per share for preferred stock and common stock?

A) The book value is $120 per share for preferred stock and $182.50 per share for common stock.
B) The book value is $300 per share for preferred stock and $137.50 per share for common stock.
C) The book value is $100 per share for preferred stock and $187.50 per share for common stock.
D) The book value is $320 per share for preferred stock and $132.50 per share for common stock.

Question 29

Rate of return on total assets shows the relationship between net income available to common stockholders and average common equity.

Question 30

Rate of return on total assets uses net income and interest expense from the income statement, and average total assets from the balance sheet.

Question 31

Which of the following is the amount computed by the following formula?
(Net income - preferred dividends) / Average common stockholders' equity

A) The amount computed from the formula is income tax expense.
B) The amount computed from the formula is deferred taxes payable.
C) The amount computed from the formula is the rate of return on common stockholders' equity.
D) The amount computed from the formula is the rate of return on total assets.

Question 32

Which of the following is the amount computed by the following formula?
(Net income + interest expense) / Average total assets

A) The amount computed from the formula is deferred taxes payable.
B) The amount computed from the formula is income tax expense.
C) The amount computed from the formula is the rate of return on total assets.
D) The amount computed from the formula is the rate of return on stockholders' equity.

Question 33

Which of the following measures a company's success in using assets to earn income?

A) The rate of return on stockholders' equity measures a company's success in using assets to earn income.
B) Net income measures a company's success in using assets to earn income.
C) Taxable income measures a company's success in using assets to earn income.
D) The rate of return on total assets measures a company's success in using assets to earn income.

Question 34

Which of the following shows the relationship between net income available to common shareholders and average common equity?

A) Net income shows the relationship between net income available to common shareholders and average common equity.
B) The rate of return on total assets shows the relationship between net income available to common shareholders and average common equity.
C) Taxable income shows the relationship between net income available to common shareholders and average common equity.
D) The rate of return on common stockholders' equity shows the relationship between net income available to common shareholders and average common equity.

Question 35

Which of the following is the formula for computing return on equity?

A) (Net income - total assets) / Average common stockholder's equity
B) (Net income - preferred dividends) / Average common stockholders' equity
C) (Net income + total assets) / Average common stockholders' equity
D) (Net income + interest expense)/ Average common stockholder's equity

Question 36

The following information is from the books of Eastern Corporation.
$$\begin{array} { | l | r | } \hline \text { Net income } & \$ 170,000 \\\hline \text { Preferred dividends } & 24,000 \\\hline \text { Interest expense } & 17,500 \\\hline \text { Beginning of the year amounts: } & \\\hline \text { Total assets } & 900,000 \\\hline \text { Total liabilities } & 375,000 \\\hline \text { Total common stockholders' equity } & 395,000 \\\hline \text { End of the year amounts: } & \\\hline \text { Total assets } & 930,000 \\\hline \text { Total liabilities } & 405,000 \\\hline \text { Total common stockholders' equity } & 435,000 \\\hline\end{array}$$ Which of the following is the return on assets for Eastern Corporation?

A) 20.5%
B) 17.5%
C) 19.2%
D) 16.8%

Question 37

The following information is from the books of Western Corporation:
$$\begin{array} { | l | r | } \hline \text { Net income } & \$ 170,000 \\\hline \text { Preferred dividends } & 24,000 \\\hline \text { Interest expense } & 17,500 \\\hline \text { Beginning of the year amounts: } & \\\hline \text { Total assets } & 900,000 \\\hline \text { Total liabilities } & 375,000 \\\hline \text { Total common stockholders' equity } & 395,000 \\\hline \text { End of the year amounts: } & \\\hline \text { Total assets } & 930,000 \\\hline \text { Total liabilities } & 405,000 \\\hline \text { Total common stockholders' equity } & 435,000 \\\hline\end{array}$$ Which of the following is the return on assets for Western Corporation?

A) 30.0%
B) 78.3%
C) 62.1%
D) 26.7%

Question 38

The following information is from the books of Eastern Corporation.
$$\begin{array} { | l | r | } \hline \text { Net income } & \$ 170,000 \\\hline \text { Preferred dividends } & 24,000 \\\hline \text { Interest expense } & 17,500 \\\hline \text { Beginning of the year amounts: } & \\\hline \quad \text { Total assets } & 900,000 \\\hline \text { Total liabilities } & 375,000 \\\hline \text { Total common stockholders' equity } & 395,000 \\\hline \text { End of the year amounts: } & \\\hline \text { Total assets } & 930,000 \\\hline \text { Total liabilities } & 405,000 \\\hline \text { Total common stockholders' equity } & 435,000 \\\hline\end{array}$$ Which of the following is the return on equity for Eastern Corporation?

A) 35.9%
B) 33.4%
C) 30.3%
D) 35.2%

Question 39

The only taxes imposed on a corporation are franchise taxes.

Question 40

Income tax expense is equal to income before tax multiplied by the income tax rate.

Question 41

The entry to record income taxes always includes a debit to income tax payable.

Question 42

Which of the following rates is the rate at which most corporations pay federal income tax?

A) 50%
B) 40%
C) 20%
D) 35%

Question 43

Which of the following amounts must be determined to account for the income tax?

A) Income tax expense and income tax payable must be determined.
B) Income tax payable and rate of return on total assets must be determined.
C) Income tax expense and rate of return on stockholders' equity must be determined.
D) Rate of return on stockholders' equity and rate of return on total assets must be determined.

Question 44

Which of the following is the most common cause of a difference in income tax expense and income tax payable?

A) Income tax expense and income tax payable should be the same amount.
B) The most common cause is the use of the installment method for the tax return and immediate recognition of income for the income statement.
C) The most common cause is the use of accelerated depreciation for the tax return and straight-line depreciation for the income statement.
D) The most common cause is the use of direct write-off for the tax return and the allowance method for uncollectible receivables for the income statement.

Question 45

Which of the following is the amount computed by the following formula?
Income before tax from the income statement x Income tax rate

A) The amount computed from the formula is income tax expense.
B) The amount computed from the formula is income tax payable.
C) The amount computed from the formula is the difference in income tax payable and income tax expense.
D) The amount computed from the formula is deferred taxes payable.

Question 46

Which of the following is the amount computed by the following formula?
Taxable income from the tax return x Income tax rate

A) The amount computed from the formula is income tax expense.
B) The amount computed from the formula is the difference in income tax payable and income tax expense.
C) The amount computed from the formula is income tax payable.
D) The amount computed from the formula is deferred taxes payable.

Question 47

Which of the following occurs when income before income tax from the income statement exceeds taxable income from the income tax return filed with the IRS?

A) Prepaid income tax is debited.
B) Deferred tax liability is debited.
C) Deferred tax liability is credited.
D) Prepaid income tax is credited.

Question 48

A corporation has an income tax rate of 35%, taxable income of $100,000, and income before income tax of $300,000. Which of the following would be included in the entry to record income tax expense?

A) Deferred tax liability is credited for $35,000.
B) Prepaid income tax is credited for $35,000.
C) Income tax expense is debited for $70,000.
D) Income tax payable is credited for $35,000.

Question 49

A corporation has an income tax rate of 35%, taxable income of $100,000, and income before income tax of $100,000. Which of the following would be included in the entry to record income tax expense?

A) Deferred tax liability is credited for $35,000.
B) Income tax payable is credited for $35,000.
C) Income tax expense is debited for $35,000.
D) Both B and C occur.

Question 50

McDowell Corporation has an income tax rate of 35%, taxable income of $662,000, and income before income tax of $597,000. Which of the following would be included in the entry to record income tax expense?

A) Prepaid income tax is credited for $231,700.
B) Income tax payable is credited for $208,950.
C) Income tax expense is debited for $208,950.
D) Deferred tax liability is credited for $22,750.

Question 51

Marshall Corporation has an income tax rate of 35%, income before income tax of $730,000, and taxable income of $780,000. Which of the following would be included in the entry to record income tax expense?

A) Deferred tax liability is debited for $17,500.
B) Income tax payable is credited for $255,500.
C) Deferred tax liability is credited for $28,000.
D) Income tax payable is debited for $273,000.

Question 52

Which of the following occurs when income before income tax from the income statement is less than taxable income from the income tax return filed with the IRS?

A) Prepaid income tax is credited.
B) Deferred tax asset is debited.
C) Prepaid income tax is debited.
D) Either B or C occurs.